“This time around, sources said, the SEC’s focus has shifted to issues such as data feeds and whether certain market players may get an information advantage, as well as adequate investments by exchanges into technology and infrastructure.”

“More cases involving stock exchanges are pending, according to a person familiar with the matter, suggesting the SEC’s leash will grow tighter this year.”
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If it is true that pension funds will be particularly hit by this tax, then that means those pension funds are trading way too often, squandering too much of our pension-money on transaction fees. Buy-and-hold investors won't be much affected by this tax, and pension funds should be the ultimate long-term buy-and-hold investors.

You say "The purpose of the stock market is to allow companies to raise money so they can invest in new plant etc, and for savers to be able to allocate capital efficiently (i.e. to the companies with the best prospects)." Perhaps an over-simplification. Capital raising through IPO and rights issues is only one of several functions of a modern stock market, especially when alternative channels such as venture capital and private equity provide similar services. In any case, the overwhelming volume of secondary trading on stock markets takes place between investors, and has nothing to do with capital raising by companies, other than as a supporting price discovery mechanism. More fundamentally, hedge fund manager Eric Lonergan (Money, 2009) argues that the primary function of the stock market is to provide investors with risk insurance through effective diversification. Much of the secondary trading by investors is purely speculative, a zero-sum game even before transaction costs. Speculation is to be welcomed to the extent that liquid markets provide a service and may drive efficiencies in terms of lowering overall transaction costs. Whether today's frenetic trading volumes of both currencies and equities are optimal seems doubtful, given strong evidence that transaction costs offset any fleeting outperformance by active management. The danger of transaction taxes is that they may only exacerbate the problem of financial intermediaries siphoning funds from naive investors who fail to perceive the benefits of following a passive management approach, focused on minimising trading and other transaction costs.

You say "The purpose of the stock market is to allow companies to raise money so they can invest in new plant etc, and for savers to be able to allocate capital efficiently (i.e. to the companies with the best prospects)." Perhaps an over-simplification. Capital raising through IPO and rights issues is only one of several functions of a modern stock market, especially when alternative channels such as venture capital and private equity provide similar services. In any case, the overwhelming volume of secondary trading on stock markets takes place between investors, and has nothing to do with capital raising by companies, other than as a supporting price discovery mechanism. More fundamentally, hedge fund manager Eric Lonergan (Money, 2009) argues that the primary function of the stock market is to provide investors with risk insurance through effective diversification. Much of the secondary trading by investors is purely speculative, a zero-sum game even before transaction costs. Speculation is to be welcomed to the extent that liquid markets provide a service and may drive efficiencies in terms of lowering overall transaction costs. Whether today's frenetic trading volumes of both currencies and equities are optimal seems doubtful, given strong evidence that transaction costs offset any fleeting outperformance by active management. The danger of transaction taxes is that they may only exacerbate the problem of financial intermediaries siphoning funds from naive investors who fail to perceive the benefits of following a passive management approach, focused on minimising trading and other transaction costs.

Strategies like latency arbitrge are a tax that is already being imposed on most traders. It goes into the pockets of the high net worth hedge fund managers who co-locate their servers directly at the exchange.

Before imposing additional taxes, it would be nice if the current ones were removed. This could be done through enforcement of existing regulations or enactment of new ones.

There is a piece out by a high volume, high frequency trader who is in favor of a transactions tax though it will end his business as it currently runs. He says the liquidity now is way past the lubricant level - note the rise in trading volumes over the last decade - and this additional form of liquidity has significant costs. We saw some of that in the financial crisis itself. I think a viscosity analogy might be clear: the liquidity lacked viscosity, meaning it was too watery. This kind of liquidity can be yanked out very quickly. It can be stopped more easily within the banking system and doesn't provide real liquidity - of the viscous, oily kind - when needed.

Good point on the high-frequency trading. Arbitrage has a valuable purpose, but technology has allowed for arbitrage opportunities to occur at such a minute level that it is almost ridiculous. Since people can engage in naked trades, there are a small caste of traders that do nothing but engage in a furious second-by-second game of buy-low, sell-a-fraction-of-a-pennny-higher, while never actually holding assets. This just increases volatility and can have negative feedbacks when an asset starts steeply trending down or up, as high-frequency trading can artificially magnify the swing.

I think a ban on naked trades would solve some of the problem, since the trader would actually have to take possession of the asset before attempting to flip it. Futures options would be exempt (and I don't believe that traditional options trading is necessarily a culprit in high-frequency trading). Alternatively, the government could theoretically create another category of capital gains tax: "ultra-short-term captial gains" (for assets held less than a day, for example) and charge a usurious rate. This would place additional costs on trading activity where the profit margins are already extremely tight.

(and it seems, at heart, an intrinsically anti-British move since the UK has the largest financial sector)

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I'm wary of the tax due to concerns about territoriality, but this oft-repeated claim in the UK is nonsense. The financial tax is much more likely to be imposed in the Euro-Zone only, as the UK has a veto on an EU-implementation, so it's actually much more likely to help the City than to hinder it.

How many years have I been pining to read the Economist say this:
"A third issue is that liquidity is a means to an end, not an end in itself. The purpose of the stock market is to allow companies to raise money so they can invest in new plant etc, and for savers to be able to allocate capital efficiently (i.e. to the companies with the best prospects). It is not clear that trading every millisecond serves that purpose. The function of the foreign exchange market is to make it easier for companies to trade and for capital to flow to the best international destinations; again it is not clear that the average currency holding period of 31 seconds (according to Andrew Lapthorne of SocGen) serves that purpose."

1. Hedge funds can move. But will they still be able to survive on their own, without the counterparties? For all the talk, the idea of hedge funds trading in virtual contracts with hedge funds on Bahamas is a pipe dream. They don't trust one another nearly enough.

2. What this thing will really kill is high frequency trading, which deserves to be killed every single bit. It's a simple "latency arbitrage", and, in this regards, is very similar to "knowledge arbitrage" otherwise known as insider trading and "relationship arbitrage" otherwise known as corruption.

It is quite understandable that some in the industry are scared, but this is yet another attempt to tactically mislead the public.

"It's a simple "latency arbitrage", and, in this regards, is very similar to "knowledge arbitrage" otherwise known as insider trading and "relationship arbitrage" otherwise known as corruption."

I agree that high-frequency trading does potentially more harm than good, and should be curtailed. However, your definition of arbitrage is far to heavy handed and cliche. Knowledge arbitrage is not insider trading -- it is going out and doing research to gain a comparative edge in information. Even in today's internet world, there is critical analysis that can reveal fundamental strengths and weaknesses in companies that may not be known to the wider market (think "Moneyball" for asset trading). To give a simpler example, the internet is making it easier to comparison shop, but harder to find meaningful differences in prices (which is not a bad thing -- it shows the efficiency of the markets). Nevertheless, for those shoppers who are extraordinarily diligent and patient, they can uncover unique deals that may only be available for a short window. That is a simple form of knowledge aribtrage at work.

I don't really know what you mean by "relationship" arbitrage. If you are talking about traders giving some sort of "friends and family" discount to someone, there really is no adverse impact on the market as a whole: the person giving the discount is effectively rebating the buyer a portion of the seller's profit, so the buyer's gain is proportional to the seller's loss, and the wider market is unaffected. If, on the other hand, you are referring to some sort of exclusivity deals, then this is an antitrust violation. Alternatively, you may be referring to giving non-public tips to special friends, which is insider trading (also illegal).

All in all, arbitrage serves a valuable purpose in a free market: it provides incentives for people to do research and gather knowledge about investments, to exploit any temporary inefficiencies they find, and thereby erase those temporary inefficiencies. High-frequency trading, on the other hand, accomplishes none of these goals, and is predicated solely on guessing at volatility trends, without regard to what asset they are actually trading.

You get it backwards; I do not define "knowledge arbitrage" as insider trading, I'm saying that we may just as well at one point start using fancy terms like "knowledge arbitrage" to defend insider trading if we are using some obfuscated terms like "high frequency trading" to defend practices that purely exploit uneven access to trading platform by different market participants.

Funny, when I re-read your quote, it sure sounds like you are defining knowledge arbitrage as insider trading, and relationship arbitrage as corruption.

In any event, this is not an issue of semantics. High frequency trading is not some sort of camouflaging terminology -- it is a simple description of exactly what is happening (and I also note that there is nothing illegal in what they are doing). Likewise, the term arbitrage covers market behavior that is actually beneficial to creating an efficient market.

Capitalism has always been about taking advantage of your advantages. A factory that is closer to a seaport or a railhead has a competitive advantage over a factory that has to haul their products from several miles away, but nobody cries about "uneven access". The concern about high frequency trading is not that people are exploiting technological advances (kudos to folks that can do so, I say). The concern should be about how the high frequency trading impacts the market as a whole, i.e. whether it creates more instability versus more efficiency. If high frequency trading did not create problems for anyone else, then I don't think we would cry and scream over someone having "uneven access", anymore than we would cry and scream over someone having more money, better education, or luckier timing. High frequency trading should be evaluated based on its consequences, not based on some envy or perceived inequity of the participants' ability to exploit advantages.

I don't know why the press keeps bringing up the Tobin Tax and acting concerned when it is clear that it won't take place in Britain. All of the major political parties are opposed to it and taxes cannot be imposed on an EU state without the consent of that state's government. Even the anti-avoidance measures proposed by Eurozone officials probably run afoul of international law.

Consider the following scenarios:

1. The tax would still use the “residence principle” underlying the Commission proposal, which taxes any trade authorised by a group that is located in the tax area, even if the actual transaction were executed in London, New York or Hong Kong. Eurozone officials are seeking to make this design more watertight by requiring any financial product issued by a government or company in the transaction tax area also be subject to the levy, regardless of where the parties executing the trade are based.
-From http://www.ft.com/cms/s/0/4028c5d4-37ba-11e1-9fb0-00144feabdc0.html#axzz...

As long as the non-Eurozone counterparty in this transaction does not have to pay any extra, then this idea should not intrude on London's business at all. If a American fund and a French bank enter into a trade in a London exchange, the Tobin tax gets charged on this trade but the French bank by itself is liable to pay it. Charging the American fund or the British exchange for this tax is clearly extraterritorial taxation and both the Britiah and Americans can take the eurozone to international court over this. So all the FTT will do is give the Eurozone a competitive disadvantage. However, let's assume for argument's sake that collecting taxes from an entity based outside of your jurisdiction is legal. All that will happen is the FTT will make Eurozone banks/governments/etc toxic, and no one will deal with them unless they create a subsidary located outside the Eurozone for all international business. And this helps the Eurozone out how?

2. One key decision pending in Brussels could make this easier. If NYSE Euronext and Deutsche Börse win approval next month for a merger to create the world’s biggest exchange, the majority of European exchange traded derivatives would be cleared in Frankfurt, giving eurozone governments the chance to slap a levy on trading in most euro-denominated products, even when it involves London institutions. One eurozone diplomat said: “It is clear that if we had to do something at the eurozone level it would have to be designed in such a way that it would not be an unfair benefit to London if it decides not to join.”
-From http://www.ft.com/cms/s/0/4028c5d4-37ba-11e1-9fb0-00144feabdc0.html#axzz...

Again, I forsee legal problems for this. If this were applied, London could join with the other financial centres in a lawsuit, forcing the tax to only be applied if the trade were done in the Eurozone. Again, let's assume that if the eurozone could get away with taxing all euro denominated trades worldwide, all it would do is make the Euro toxic and massively reduce liquidity. It would be more attractive to trade the North Korean Won instead of the Euro if every Euro transaction involved a tax that went through the chain and was borne by all parties. Again, the Eurozone would suffer the most if this were to happen.

There is a saying somewhere regarding cutting off one's nose to spite one's face...

financial transactions tax seems the last communication campaign going nowhere to distract attention from dealing with greater issues such as tackling the tax haven aberration (misallocation of resources in a market system). Who is paying the price?

As usual with arguments around the value of liquidity, Wyman decline to put a price on it. Thus, the increased costs associated with reduced liquidity will "likely" represent an inefficiency in this tax. As far as I can tell, the implicit argument around liquidity goes like this:
- increased liquidity is good (no argument from me there)
- there is no clear way to put a value on increased liquidity
- therefore, increased liquidity must be good value at any price

This is similar to my contention to my wife that if a glass of wine is good for your health, think how beneficial the whole bottle will be!

What we need is a way to estimate the value of a marginal increase in liquidity. It seems apparent to me that this marginal value (likely) long ago became insignificant for ordinary investors (distinguishing them from traders/speculators in terms of trading frequency). Any argument that we should be grateful for various institutions providing even more liquidity can be dimissed until they can out a realistic value on it.

It would be better to eliminate the bank's printing tax on public spending. Printing drives up the cost of providing public services faster than the CPI, which is a major part of why myriad state and local budgets are in so much trouble. The bank taxes government, and redistributes the resources primarily to the financial sector.

Letting the bank distort the economy with the printing tax, then trying to tax part of it back with a transaction tax just leads to double distortion of the free market. Just eliminate the bank's printing tax, and it will be easier to balance the budget. A side benefit will be a better median standard of living for consumers, and more efficient capital allocation by the free market.